Outlook: Gartmore goes for indexation

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The Independent Online
The big active fund management groups have had a rough time of it lately. Try as they might, they keep on underperforming the index. Given that active fund management costs a good deal more than having someone track the index for you, this seems a pretty rum deal. Many trustees have come to wonder why they are employing these people. Gartmore Investment Management, one of the big four, yesterday came up with a wizzard wheeze to help stop the rot - er, rather than you having to go to the bother of moving to an indexed fund, they'll index your money for you. That way you can be guaranteed not to underperform.

To be fair, it's not quite as simple or silly as that. Gartmore plans to offer a mix of passive and active management within its core balanced fund product. A large slug of the money, in some cases the larger part of it, will be passively managed to satisfy accelerating demand from trustees for indexation. But the rest will be actively managed within "conviction" porfolios that target higher returns. According to Gartmore, this will help clients establish the right balance between risk and reward.

It hardly needs pointing out that the idea won't necessarily solve the problem. If Gartmore continues to underperform in active management, then the balanced fund will underperform as well, albeit not by as much. Furthermore, if this is what trustees really want, what's to stop them dividing up the money themselves between active and passive managers? Actually this is what larger pension funds do already. Unfortunately it's generally not cost effective for smaller funds. So Gartmore is probably correct in believing there could be demand for this kind of product. Certainly a number of leading actuaries have been talking recently about the need for precisely this kind of thing.

All the same, the initiative does rather seem indicative of a general dumbing down of fund management. If you can't beat `em, join `em, seems to be the attitude of a growing number of active fund managers. Never mind the reality of indexation. Fear of it is driving fund managers into the index in growing numbers too, feeding its upward march, and making it more difficult still for the active managers to keep up.

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